Report No. 31la-KE Appraisal of the GIMPY TeaFactory Project Kenya May 2, 1974 East Africa Project Department Agriculture Projects Division Not for PublicUse Document of the International Bank for Reconstruction and Development InternationalDevelopment Association Thisreport wasprepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Report No. 31la-KE
Appraisal of the GIMPYTea Factory ProjectKenyaMay 2, 1974
East Africa Project DepartmentAgriculture Projects Division
Not for Public Use
Document of the International Bank for Reconstruction and DevelopmentInternational Development Association
This report was prepared for official use only by the Bank Group. It may not be published,quoted or cited without Bank Group authorization. The Bank Group does not accept responsibilityfor the accuracy or completeness of the report.
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CURRENCY EQUIVALENTS
Currency Unit - Kenya Shillings (Kah)Ksh 1.00 - US$0.l4Ksh Million - US$140,056M1.00 Sterling - Ksh 17.25
CDC - Commonwealth Development CorporationKTDA - Kenya Tea Development Authority
KTDA FINANCIAL YEAR
July 1 - June 30
0KENYA
TEA FACTORY PROJECT
TABLE OF CONTENTS
Page No.
SUMMARY AND CONCLUSIONS ....... ....................... i-
I. INTRODUCTION ........ .......................... 1
II. BACKGROUND ................................ 2
A. General ...................... 2B. Agriculture . ................................. 2C. The Tea Industry .............................. 3
III. SMALLHOLDER TEA DEVELOPMENT . . 4
A. General 4B. Kenya Tea Development Authority . . 5C. Tea Factories ................. ,.,............ 6D. Achievements under First and Second Tea Projects 7E. Future Tea Development ................ 8
IV. TIlE PROJECT ........................................... 8
A. Project Description and Detailed Features ...... 8B. Project Costs ....... ........................... 10C. Financing ....... ............................... 11D. Procurement ....... ............................. 12E. Disbursements ....... ........................... 12F. Accounts and Audit .... . . .12
V. ORGANIZATION AND MANAGEMENT ........................... 13
A. New Departments ............. .. ................. 13B. Recruitment of Staff ........... .. .............. 14C. Factory Companies .............................. 14
0
TABTLE OF CONTENTS (Cont'd)
VI. PRODUCTION, PRICES AND BENEFITS ...................... 15
A. Production and Marketi.ng .. .................... 15B. Prices ........................................ 15C. Farmer Benefits ...... ......................... 15D. KTDA's Financial Position .......... ........... 16E. Financial Position of Factory Companies ....... 16F. Goverment Budgetary Position .............. ... 17
VII. ECONOMIC BENEFITS AND JUSTIFICATION .... .............. 17
VIII. AGREEMENTS REACHED AND RECOMMENDATION ................ 18
ANNEXES
1. Value of Kenya's Principal Agricultural Exports2. Tea Area, Yields and Production
Table 1 - The Development of Kenya TeaTable 2 - Smallholder Tea Area by Districts for 1972/73Table 3 - Yields (Third Plan - 2nd IDA Project)Table 4 - Smallholder Tea Production
3. Smallholder Tea Development
Table 1 - Cost of Leaf Inspect^ion and Collection ServicesTable 2 - Net Payment to Growers 1961/62 - 1971/72Table 3 - Comparison between Appraisal Estimates and
Actual Cash Flow of IDA Credits 64-KE and 119-KE
4. Factory Development
Table 1 - Existing Factories, Capital Structure andFinancial Performance
Table 2 - Projected Factory RequirementsTable 3 - Capital Costs of Tea Factory of 1,200 ton/year
Chart - Average Tea Prices for Selected Countries (IBRD 4605(9R))
8. Model Farm Budget
9. KTDA Financial Position
Table 1 - Summarized Balance Sheet at June 30, 1973Table 2 - Profit and Loss AccountTable 3 - Projected Cash FlowTable 4 - Projected Income and Expenditure Accounts
10. Impact on Government Budget
Table 1 - Government Cash Flow Arising from the Project
11. Economic Rate of Return
Table 1 - Economic Rate of Return
CHART
KTDA Organization (IBRD 7574R)
MAP
IBRD 10381
.
KENYA
TEA FACTORY PROJECT
SUMMARY AND CONCLUSIONS
i. The economy of Kenya is largely dependent on agriculture, and as a
consequence of the country's rapidly expanding population, intense pressure
on the land has resulted in steadily increasing rural poverty. The Government
is therefore making strenuous efforts to raise agricultural output and to
improve living conditions in the rural areas. The major thrust of the 1970-74
Development Plan is directed towards increasing the share of total resourcesavailable to these areas as a means of providing improved income earning
opportunities for the rural poor. It is estimated that at least one half of
the farm families in the heavily populated areas suitable for tea growing
have no significant cash income, and tea is the one major cash crop which
offers them an opportunity to substantially improve their standard of living.
The annual income of those owning 0.32 ha of mature tea is about Ksh 1,300(US$185) as compared with an average agricultural income of about Ksh 420(US$60). The tea program has therefore made a substantial contributiontoward alleviating rural poverty.
ii. The Project would provide processing facilities for tea plantedby about 35,000 smallholders under previous KTDA development plans and nowcoming into full production. It would not expand the acreage under tea butwould complement two previous IDA credits for the development of smallholdertea production. The first in 1964 for US$2.8 million provided for theplanting of some 5,800 ha of tea and included provision for leaf collectionservices and maintenance of tea roads. The second credit in 1968 extendedplantings by some 6,000 ha. Under the Project 17 tea factories, each withan annual capacity of 1,200 tons made tea, would be constructed and equipped.The Kenya Tea Development Authority (KTDA) would directly manage all newfactories. In order to help implement this increased management responsi-bility, three new departments would be created within KTDA: Factory Con-struction and Management, Marketing, and a Secretary's Department. Atraining wing would also be added to one of the new factories which wouldprovide facilities for the training of factory managers.
iii. All new KTDA factories would be established as limited companieswith KTDA initially the sole shareholder and creditor and serving as managingagents for design, supervision of construction and management. KTDA wouldimpose a charge of Ksh 0.16/kg made tea for these services. As the newfactories become profitable, growers would be encouraged to purchase shares.
iv. Total five year Project cost is estimated at Ksh 162 million(US$22.7 million) of which about US$10.9 million or 48% would be foreignexchange. The proposed IBRD Loan to KTDA of US$10.4 million would financeabout 50% of total Project costs excluding sales taxes. A CommonwealthDevelopment Corporation (CDC) loan of US$6.3 million would finance about
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30% of Project costs. IBRD and CDC together would finance all foreign ex-change and about 49% of local costs. Government would as its contributionlend US$6.0 million to KTDA. The IBRD loan would be at an annual interest rateof 7-1/4%, and CDC's loan would be at 5%. Goveirnment's loan would be ex-tended at a rate of not less than 6-1/2% per annum. All loans to KTDA wouldbe for 20 years with a seven-year moratorium on principal. KTDA would investabout 5% of the loan proceeds as share capital in new tea factories, and wouldonlend the balance to the factories at an interest rate of 7-3/4% for 16 yearswith three years moratorium on principal. Orders for vehicles, and factorybuildings, plant and equipment in excess of US$30,000 would be procured byinternational competitive bidding in accordance with Bank/IDA guidelines.Goods and services costing between US$10,000 and US$30,000 would be procuredafter competitive bidding on the basis of local advertisement. Contracts forless than US$10,000 would be made on the basis of quotations from localsuppliers.
v. At full development in 1981/82, the factories would process about19,000 tons of made tea per annum, about 85% of which would be exported.This would have a gross foreign exchange value of Ksh 130 million (US$18million) per annum.
vi. In calculating the economic rate of return of the Project it hasbeen assumed that the opportunity cost of labor is one-half of the daily wagerate of Ksh 4.0 and that a rate of Ksh 10 per US$1 reflects the economic valueof foreign exchange to Kenya. On these assumptions the rate of return iscalculated to be 24%; with no shadow pricing of foreign exchange the rate ofreturn would be 17% and with no shadow pricing of either foreign exchange orlabor it would be 10%. The rate of return is sensitive to changes in costsor benefits. A 10% increase in Project costs or a 10% reduction in benefitswould reduce the estimated return to 20%; the combination of both wouldreduce the return to 17%.
vii. The Project is suitable for an IBRD loan of US$10.4 million to KTDA.
_ ~~~~~~~~~KENYA
TEA FACTORY PROJECT
I. INTRODUCTION
1.01 Kenya's agricultural development strategy aims at bringing a sub-stantially larger number of smallholders into the market economy. As a conse-quence of the country's rapidly expanding population, intense pressure on theavailable land has resulted in steadily increasing rural poverty. The majorthrust of agricultural policy is, therefore, directed at a massive expansionof income-earning opportunities for the small peasant farmer. This goal ismade more difficult, however, by the fact that through a combination of worldmarket constraints, near internal self-sufficiency and a limited opportunityfor crop diversification, a significant proportion of the farming populationis unlikely to have access to a marketable cash crop. It is therefore neces-saryv that any crop which can make a substantial contribution to total incomeancl employment should be encouraged. The areas of Kenya suitable for teagrowing generally constitute some of the country's most heavily populatedareas, and it is estimated that at least one half of the farm families haveat present no significant cash income. As alternative crops have been succes-sful only in limited parts of these areas, tea remains the major cash cropwhich offers an opportunity to improve the standard of living of this largerural population.
1.02 Two IDA credits have been extended for the development of small-holder tea production in Kenya. The first in 1964 for US$2.8 million providedfor the planting of some 5,800 ha and included provision for leaf collectionservices and maintenance of tea roads. The second credit extended plantingsby some 6,000 ha. Factory construction was not financed by IDA under eithercredit. Existing factories have been constructed by the Kenya Tea DevelopmentAuthority (KTDA) with substantial assistance from the Commonwealth DevelopmentCorporation (CDC). Factory capacity now must be expanded, however, in orderto process tea planted under previous IDA credits which is now reaching ma-turity. The proposed Project would provide for the construction of 17 newtea factories to handle the expected increased volume of tea production.
1.03 Seven other loans or credits totalling US$23.7 million have assistedthe agricultural sector in Kenya since 1960. These include a loan in 1964of US$2.6 million to assist the Kenya settlement program and two agriculturalcredits in 1967 and 1972 to finance on-farm development. The livestockindustry has been assisted by a credit of US$3.6 million which provided forthe development of group, company and individual ranches, augmented servicesto the livestock industry and assisted in the development of semi-arid grazingareas. A second and more comprehensive credit for about US$20 million hasbeen negotiated but has not yet been approved. In 1970 a loan of US$2.6million was extended for afforestation for saw-wood and pulpwood production.In general, all projects have been well-executed, although institutional andstaffing problems have given some concern.
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1.04 This Project was prepared by the Kenya Tea Development Authority(KTDA) with assistance from the Ministry of Agriculture and the Bank'sResident Mission in East Africa. The Project as originally planned in-cluded provision for the planting of an additional 14,800 ha of smallholdertea, for expanded leaf collection facilities, and for construction of 22factories to process tea from both new and already established plantings.After appraisal a Bank study 1/ revealed the unfavorable future prospectsfor tea and the adverse effect which further plantings would have on worldprices. Consequently, the Bank has decided that it would support the expansionof tea production only under very special circumstances. Accordingly, theplanting and leaf collection elements and the factories related to these newplantings were excluded and the Project re-constituted to include only. factoriesrecuired for the processing of tea already planted. The further plantingprogram will, ho'vever, be financed by CDC. The Project was appraised inNovember/December 1972 in conjunction with a CDC mission, by Messrs. E.Zimmer-Vorhaus, G.U. Mbanefo, W. Stolber (Bank/IDA) and W. Coultas (Consultant).
II. BACKGROUND
A. General
2.01 Lying astride the equator on the eastern coast of Africa, Kenyahas an area of 582,750 km2 and is a country of striking topographical andclimatic variety. Almost all economic activity is concentrated in the south-ern third of the land area, which supports over 85% of Kenya's population -now estimated at 12 million. This area is bounded by the hot and humid coastalarea in the East, and by Lake Victoria in the West. Stretching between arehigh sweeping plateaus, varying in altitude from 900 to 3,000 m and contain-ing some of Africa's most fertile soil.
2.02 Kenya's Gross National Product (GNP) in 1971 was just over US$1.9billion, with an average per capita income of US$170; this figure is signifi-cantly lower in rural areas, however. The average annual rate of increasein Gross Domestic Product (GDP) in real terms for the past eight years hasexceeded 6.5%, resulting in significant improvements in per capita incomedespite an annual population increase of over 3.3%.
B. Agriculture
2.03 Agriculture is the most important sector of the economy. It pro-vides a livelihood for 90% of the population, generates over 60% of theforeign exchange earnings and contributes between 35% and 40% of GDP. Signif-icant strides have been made in the development of this sector over the lastdecade and substantial increases have been attained in the production of
1/ Bank Financing of Tea, R73206, August 1973.
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Kenya's main export crops - coffee, tea, and pyrethrum (Annex 1). Other cropssuch as sugar, rice and cashew nuts have also been important. It has longbeen Government policy that the natural potential for exportable cash cropsshould be exploited to the fullest extent and that smallholders should par-ticipate as far as possible in this development. To foster this pattern ofagricultural development several smallholder credit schemes and specializedagencies were set up; these include the Agricultural Finance Corporation,the Kenya Tea Development Authority and other Boards for such crops ascotton, coffee and pyrethrum.
C. The Tea Industry (Annex 2)
2.04 Commercial production of tea started in the mid-1920's and by 1945about 4,000 ha had been planted on estates. By 1972 tea estate plantingshad increased from 10,000 ha in 1955 to 23,000 ha. Early in the 1950's theDepartment of Agriculture began experiments on smallholder tea cultivation,and in 1952 pilot projects were started in Nyeri and Kericho Districts. Greenleaf from these schemes was processed by commercial estates and marketedthrough Provincial Tea Marketing Boards. The success of these pilot schemesled to the establishment in 1961 of the Special Crop Development Authority,
* which in 1964 became the Kenya Tea Development Authority (KTDA). KTDA wasestablished as a statutory authority to provide the integrated servicesrequired by smallholders to enable them to participate in tea growing,including credit, extension and leaf collection services and the manufactureof green leaf. KTDA was authorized to recover its operating costs by cesseslevied on green leaf produced (and for which it has a purchasing monopoly);it thus developed into a fully autonomous commercial venture bringing manyof the advantages of large scale tea production to smallholders.
2.05 Under KTDA's First Tea Plan, financed by CDC and the Federal Re-public of Germany, 4,200 ha were planted by the end of the 1963/64 plantingseason. Together with CDC, IDA made its first tea Credit (64-KE) in 1964for KTDA's Second Tea Plan, which by 1967/68 had added a further 6,600 haof tea. With CDC, IDA made a second Credit (119-KE) in 1968 to assist withthe implementation of the Third Tea Plan, and 13,700 ha were planted by1971/72. Including the tea component of the settlement program (1,440 ha)which was financed independently, by the end of 1972, 26,000 ha had beendeveloped by 67,000 growers averaging 0.39 ha tea, and the smallholder shareof the total Kenya tea acreage had increased from 4% in 1959 to 56% (Annex 2,Table 1). In 1972/73, the first year of the Fourth Tea Plan, 12,400 small-holders planted an additional 4,700 ha of tea (Annex 2, Table 2).
2.06 Total Kenya tea production in 1972 was 53,300 tons or 5% of worldoutput. As a reflection of the high quality of its tea, the average pricesof Kenya teas have shown a steady increase from 14% below London marketaverage in 1959 to the world's highest in 1970 (6% above London average)
* and 1971 (9% above). Since that time they have been among the three high-est prices.
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2.07 The Tea Board of Kenya regulates the industry and promotes researchand tea consumption. It is comprised of representatives from both the estateanc smallholder sectors. The Board is maintained by cesses on the area ofplanted tea and weight of marketed tea.
2.08 Tea research for Eastern Africa is carried out by the Tea ResearchInstitute (TRI) which has its headquarters at Kericho in Kenya and maintainssub-stations in Uganda and Tanzania. TRI is funded by contributions from theTea Boards of Kenya and Uganda and the Tanzania Tea Authority. Since itsinception in 1951, research has been confined to the production of improvedand selected clonal planting material, the nutrition, cultivation and harvest-ing of the crop and the influence of climate on tea. Limited facilities haveprevented research into manufacturing processes. TRI maintains a smallextension service designed to bring up-to-date information, such as recom-mended fertilizer application rates, to the notice of tea extension workersin both estate and smallholder operations throughout Eastern Africa.
III. SMALLHOLDER TEA DEVELOPMENT
A. General
3.01 There are some 600,000 ha suitable for smallholder tea cultivationin Kenya, mainly in the districts of Kisii, Kakamega, Kericho, Nandi, Kitale,Kiambu, Muranga, Nyeri, Kirinyaga, Embu and Meru. These areas are alsogenerally suited to mixed farming and, where established, tea forms only apart of the overall activities on individual farms. Smallholder tea has thusbeen developed in varying intensity over very large areas with the objectivethat wherever possible, farmers who want to grow this crop should be enabledto do so. Individual land titles have been granted and holdings, normallyranging in size from 1.6 to 3.2 ha, have been consolidated. The tea areaslie at altitudes between 1,700 and 2,300 m with a well-distributed rainfallof about 1,200 mm/year. Soils are deep, free draining, acid and of volcanicorigin, and thus are ideally suited to tea growing. For details of acreageestablished see Annex 2, Table 2 and Map.
3.02 There are three major elements involved in the smallholder teaindustry in Kenya. First, the grower plants and cultivates his tea on smallfarms along with his other, mainly subsistence, farming activities. Secondly,KTDA - which also provides credit and extension services - purchases thegreen leaf from the farmer at a set price and transports it to the factories.KTDA meets the operating costs of these service activities through a cess ongreen leaf purchased. Thirdly, the -actories then purchase the leaf fromKTDA for processing and marketing through commercial or private chanmels.Although established as separate companies, the factories are essentiallyservice units which, after meeting their costs and a fixed dividend to share-holders, pay any surplus to X¶2DA for distribution to growers. Thus far KTDA
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has been only a shareholder in the factories, as their management has beenentrusted to commercial tea companies acting as managing agents. With regardto future factories, however, KTDA would not only be the principal share-holder but would take over direct management responsibilities.
B. Kenya Tea Development Authority (KTDA)
3.03 KTDA's Board of Directors is composed of a Chairman and 15 membersincluding representatives from CDC, the Provincial Administration, the Ministryof Agriculture, elected representatives of growers, and the Chairman of theTea Board of Kenya. Much of the decision making is delegated to the GeneralManager, who has operational responsibility and control over the three existingdepartments: the Technical Department, providing extension services; theAdministrative Department, controlling leaf inspection and collection in addi-tion to administrative services; and the Accounting Department handling KTDA'sand grower accounts.
3.04 Field Development and Extension Services. New smallholders areselected by District Tea Committees representing tea smallholders and byKTDA supervisory staff on the basis of farming experience and a satisfactory
* land title. KTDA is responsible for the issue of planting licenses to grow-ers. Initially all planting material was produced by KTDA and it was thusable to control all new plantings. With the introduction of vegetativepropagated (VP) material it became feasible for growers to operate their ownnurseries, and KTDA now retains control over tea acreage through the licen-sing system alone. KTDA still maintains nurseries to supply leaf cuttingsto new growers. It also extends credit to growers for purchase of plantingmaterial and fertilizer. Extension work is directed by the Chief TechnicalOfficer assisted by an Assistant Chief Technical Officer with responsibili-ty for nurseries and farmer training. All field extension staff are secondedfrom the Ministry of Agriculture. Farmer training concentrates on shortcourses at local farmer training centers and on farm demonstrations and fielddays.
3.05 Leaf Collection and Inspection. KTDA inspects and buys leaf fromsmallholders at widely dispersed centers which are so located that no growerhas to transport leaf more than 5 km from his tea holding. Each center willultimately handle about 250 tons of green leaf per year. KTDA constructsleaf bases near each factory; the bases serve as the administrative centersof the Leaf Inspection and Collection Service, and through them the leaf issold to factories. Each base includes housing for the Leaf Officer andhis staff, offices and stores. Details of cost of these services are givenin Annex 3, Table 1.
3.06 Payment to Growers. At the end of each month KTDA pays to growers* about Ksh 0.90/kg for green leaf, less deductions for cess (para. 3.07). In
accordance with KTDA's agreements with factories, at end of each year the
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latter pay to KTDA for distribution to growers all surpluses after meetingoperating costs, debt service, taxes and a fixed dividend of 8% on sharecapital. Details are given in Annex 3, rable 2.
3.07 Financial. About 85% of KTDA's income is derived from a cess ongreen leaf delivered. This levy, established by statutory order, is intend-ed to help meet KTDA's operating expenses and debt services. This cess ispresently set at a level of Ksh 0.32/kg on green leaf delivered, but with theexpected reduction in unit costs brought about by increased production, it isexpected that the cess would be gradually reduced. Other sources of incomeare irnterest margins on loans made to growers, dividends from factory companies(para. 3.10), a development charge of Ksh 0.03 per tea bush planted, and netproceeds of sales to growers of planting materials and fertilizer.
3.08 KTDA's total long-term indebtedness as at June 30, 1973 was Ksh 36million (US$5 million). These debts comprise IDA Credits 64-KE and 119-KEon-lent to KTDA by Kenya Government (44%), CDC loans (43%) and smaller amountsborrowed directly from other sources. Over the years KTDA has built upoperational deficits which by 1973 totalled Ksh 21.1 million (US$3.0 million).These deficits arose during the initial years of smallholder tea developmentwhen KTDA provided a high level of services to growers and costs were notfully covered by annual income. However, in the twelve months ending June30, 1973, KTDA made a net profit of about Ksh 6.6 million (US$0.9 million),most of which was devoted to reducing the past operational deficit.
3.09 Tea Roads. Government is responsible for the construction andmaintenance of all roads used for tea collection. During the First and SecondTea Projects, about 1,300 km of roads were upgraded to allow leaf collectionvehicles to operate in all but extremely wet conditions. Maintenance ofthese roads has been generally satisfactory.
C. Tea Factories (Annex 4)
3.10 There are presently twelve tea factories processing smallholdertea and three additional factories under construction. Each of the factoriesis established as a limited liability company with a Board of Directors com-prising representatives of KTDA, CDC, the managing agents, tea growers andGovernment. Of the twelve existing factories, ten are managed by commercialtea companies acting as managing agents and two are directly managed by KTDA.KTDA and CDC are the major shareholders in eleven of the factories; the twelfthis jointly owned by KTDA and other private interests. The five factories mostrecently established each had authorized share capital of Ksh 200,000, com-prising 20,000 founders shar*es held equally by CDC and KTDA and valued atKsh 5 (each carrying 41 votes), and 20,000 growers shares also at Ksh 5 (with1 vote). Of the authorized shares, only 5,000 founders shares have actuallybeen issued. Growers may acquire shares in the factory to which they deliverleaf. Of the six factory companies established before 1971, five have sold
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shares to growers ranging in value from Ksh 30,220 by the Litein Factory toKsh 141,700 by Ragati Factory Company. In addition to share capital, eachfactory has loan capital of about Ksh 4.5 million provided by CDC and themanaging agent and bearing interest at 8 or 8-1/2% per year. A chart showingthe financial structure and past performance of factory companies is at Annex4, Table 1.
D. Achievements Under First and Second Tea Projects
3.11 As a result of an impressive farmer response, the first three TeaPlans have either been completed ahead of schedule or exceeded their targets.By the end of the Third Plan (1972) 67,000 growers had planted 26,000 ha ave-raging 0.39 ha tea per farm. Among the factors contributing to the success ofthis program have been: the integration within KTDA of all services requiredby growers; KTDA's ability to recruit a well qualified extension and administra-tive staff by paying salaries considerably above prevailing Government levels;the participation of growers at all levels of decision-making thus ensuringtheir cooperation; the strict control of leaf quality exercised by KTDA; andfinally the prompt payment to growers of an attractive price for green leafproduced.
3.12 Disbursements under the first and second IDA Credits covered KTDAcapital and operating deficits. As a result of under-estimates of expectedyields and over-estimates of costs, the actual deficits incurred were lowerthan projected. Consequently, 21% of the first Credit and 94% of the secondwere cancelled. The table below illustrates KTDA's performance as it relatedto appraisal estimates. Further details are given in Annex 3, Table 3.
Second Tea Plan Third Tea Plan(1st IDA Project) (2nd IDA Project)--------As percentage of appraisal estimates -------1967/68 1968/69 1969/70 1970/71 1971/72
Green leaf delivery 112 110 119 89 109Cost of field services n.a. 84 86 97 108KTDA deficit n.a. 44 surplus /1 56 surplus /1
/1 KTDA showed a surplus in these years. No IDA disbursement was made.
3.13 KTDA has been uniquely successful in initiating and supervising thelarge smallholder planting programs to high standards at relatively low cost,and average yields have consistently been higher than estimated. As a result,by mid-1973 some 71,000 farmers dispersed over wide areas either have receivedor are expected to receive significant increases in their cash incomes.
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E. Future Tea Development
3.14 Financial returns to farmers combined with the availability ofadditional land well suited to tea farming led KTDA to embark on its FourthTea Plan in 1972/73; in that year 4,700 ha were established. The FourthPlan proposes to establish a total of 19,500 ha of smallholder tea over thefive year period 1972/73 - 1977/78. Planting of 14,800 ha. would be financedby CDC and Government. At maturity, these plantings would require the con-struction of additonal factories.
IV. THE PROJECT
A. Project Description and Detailed Features
4.01 The Project would over the five-year period 1974/75 - 1978/79 pro-vide for the establishment of 17 tea factories required for processing leaffrom previous plantings now coming into full production. Provision wouldalso be made for factory and marketing services. The Project would be ex-ecuted by KTDA. Specifically, the Project would provide for:
(a) the construction and equipping of 17 tea factories; and
(b) the establishment of factory management, training, teamarketing and accounting services within KTDA which wouldbe required to support Project factory investments.
4.02 Factory Development (Annex 4). Experience has shown that teafactories with an annual capacity of 1,200 tons made tea are generally themost efficient. A recent consultants' study shows that if factory capacitywere doubled, processing costs could be reduced by 12%. This would, however,necessitate greatly increased road costs and the risk of factory breakdownwould involve considerably increased losses. Consequently, under the Projectthe 17 new factories would be constructed to a capacity of 1,200 tons (Annex4, Table 2). Assurances were obtained that KTDA would carry out with anynecessary assistance from consultants, a study on the most suitable form offactory design, equipment and manufacture of tea.
Phasing of Factory Construction
Year of Construction 1974/75 1975/76 1976/77 1977/78 1978/79 Total
4 3 5 2 3 17
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Leaf collection services, including the construction of leaf bases, requiredfor each factory would be financed outside the Project.
4.03 Factory Management and Training Facilities. Until such time asgrowers purchase shares, KTDA would be the only shareholder in all Projectfactory companies. KTDA would act as managing agents for these factories.In order to meet this increased management responsibility new departmentswould be created - one for factory construction and management, one formarketing, and a Secretary's Department (para 5.01). A training wing wouldbe added to one of the new factories which would provide facilities for thetraining of factory managers. Theoretical as well as practical training foreach trainee would be carried out over a four-year period. Facilities wouldbe provided for the demonstration of various production methods, and formaintenance of tea machinery.
4.04 Ecology. There are not expected to be any adverse effects on theenvironment as a result of the Project.
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B. Project Costs (Annex 5)
4.05 Total five year Project cost is estimated at Ksh 162 million (US$22.7million), of which about US$10.9 million or 48% would be foreign exchange.Project costs are summarized below:
Total Cost 84,868 77,622 162,490 11,889 10,867 22,749 48
Costs have been estimated on the basis of 1973 prices adjusted to reflectrecent currency alignments. Contingencies - 5% physical and 7% price perannum (cumulative from the first year) - have been included for all items.Costs include 10% sales tax on all capital goods amounting to US$1.9 million
(including related contingencies).
.
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C. Financing (Annex 6)
4.0)6 Project Costs would be financed by IBRD, CDC and Government in the
following proportions:
-------------------US$ million ---------- - -- ---
Govt. IBRD CDC TotalUS$ % USs$ % US$ % us$
Factory Construction 2.7 20 7.0 50 4.2 30 13.9 100Working Capital 2.3 100 - - - - 2.3 100
The proposed IBRD loan to KTDA for US$10.4 million would finance about 46%of total Project costs or 50% of Project costs excluding sales tax. The
loan would be for 20 years at 7-1/4% interest with a seven-year moratorium
on principal. The CDC loan to KTDA of US$6.3 million or 28% of total Project
costs (30% of Project costs excluding sales tax) would be on the same termsbut with an interest rate of 5%. In this way IBRD and CDC would fund, on a
joint financing basis, all foreign exchange and about 49% of local costs.
The balance of US$6.0 million would be contributed by Government. Govern-ment would lend its contribution to KTDA at an annual interest rate of not
less than 6-1/2% for a 20-year term with a seven-year moratorium on prin-cipal. KTDA would invest about 5% of the loan proceeds as share capitalin new tea factories and would onlend the balance to the factories at an
interest rate of 7-3/4% for 16 years with three years moratorium on principal.Assurances to this effect were obtained. Taxes and duties drived from theProject would over the Project period be about US$1.9 million. The netGovernment contribution would be about US$4.1 million. The delays causedby the change of the Project concept (para 1.04) make it necessary to pro-vide retroactive financing for the construction of four tea factories and
for related consultancies (US$400,000).
-12 - 0
D. Procurement
4.07 Procurement of vehicles (US$0.1 million), factory buildings(including buildings for the training factory) and factory plant and equipment(US$14.6 million) where contracts exceed US$30,000 would be by internationalcompetitive bidding in accordance with Bank/IDA guidelines; orders would bebulked wherever appropriate. Procurement of goods and services costing betweenUS$10,000 and US$30,000 would be subject to competitive bidding on the basisof local advertisement. Any contract for goods or services costing lessthan US$10,000 would be made on the basis of quotations from local suppliers.Appropriate assurances were obtained. Assurances were also obtained that (i)before proceeding with factory constructions detailed proposals and planswould be agreed with IBRD, (ii) that draft tender documents for all contractsexceeding US$30,000 would be submitted to IBRD for approval, and (iii) thatbid analysis and recommendations would be sent to IBRD for comment beforeaward.
E. Disbursement (Annex 6)
4.08 Disbursement of funds from CDC and IBRD loans would be on a jointfinancing basis and would be apportioned in the ratio 5/8 : 3/8. Finaladministrative arrangements between CDC and IBRD were agreed at negotiations.Total IBRD disbursements would cover:
(a) 51% of total expenditures for vehicles (US$34,000),construction of the training factory (US$90,000),salaries for KTDA's head office factory services andtraining factory (US$780,000), civil works for factoryconstruction (US$2,800,000), and factory plant andequipment (US$4,300,000); and
(b) an unallocated amount of US$2,396,000 representingcontingencies on the above items and transferable tothem as required.
Disbursements would be supported by full documentation. The estimatedschedule of disbursements is given in Annex 6, Table 2. Any surplus fundsremaining at the closing date would be cancelled.
F. Accounts and Audit
4.09 KTDA maintains a satisfactory accounting system which adequatelyrecords its financial transactions as well as its assets and liabilities.It also produces semi-annual income and expenditure accounts and balancesheets audited by independent accountants satisfactory to IBRD. Assurances
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that this practice would continue, and that audited accounts would be sub-mitted to IBRD within six months of the closing of the financial periodwere obtained. As individual companies, each factory would maintain itsown accounts. Assurances were obtained that these accounts would be audit-ed by independent auditors acceptable to IBRD and that such accounts wouldalso be submitted to IBRD within six months of the closing of the financialyear. Assurances were also obtained that KTDA would introduce a cost account-ing system to demonstrate the efficiency of the field and the new factoryservices.
V. ORGANIZATION AND MANAGEMENT
5.01 KTDA would execute the Project under the direction of a GeneralManager responsible to the Board (Chart). Existing Departments - Adminis-trative, Technical and Accounting (para.. 3.03) -'would continue to be or-ganized as at present. However, in order to carry out the factory developmentprogram three new Departments would be established: a Factory Department toundertake the design, construction and management of new factories and totrain factory managers and staff; a Marketing Department and a Secretary'sDepartment. The appropriate assurances as to these arrangements wereobtained. The existing factories now managed under managing agency agreementswould not be serviced by KTDA's new departments.
A. New Departments
5.02 A Factory Department (Annex 4) headed by a Chief Factory Officerwould be comprised of a factory construction and maintenance section headedby a factory engineer, a production section under a factory superintendentresponsible for regulating and supervising all aspects of tea manufacture,and a section for training factory managers under a training officer.
5.03 A Marketing Department would be established under a Chief MarketingOfficer. The department would test and evaluate tea, prepare marketingstrategy and control the flow of tea to markets and provide advice to KTDAfactories. The actual sale of tea through brokers or agents would continue.
5.04 A Secretary's Department under a qualified Secretary would keepminutes of factory company meetings, file returns required by law, transfershares to growers, maintain the necessary registers.
5.05 A factory accounting service would be provided within the existingAccounting Department. An internal auditor would also be appointed who wouldundertake a continuous and critical evaluation of the adequacy and effective-ness of KTDA's accounting and internal control systems and report directlythereon to the General Manager and Chief Accountant. KTDA maintains adequate
- 14-
records to enable a comprehensive evaluation of the Project to be made.Financial provision has been included to enable KTDA to retain consultantsto analyze this information. Procedures for evaluation were agreed duringnegotiations.
B. Recruitment of Staff
5.06 Competent management for the new Factory, Marketing and Secretary'sDepartments would be vital to the continued efficiency of KTDA. The effec-tiveness of the new departments would depend on the caliber of staff recruit-ed to fill key posts and the subsequent availability of additional technicaladvice. IBRD would therefore be consulted before appointment of the ChiefFactory Officer and the Marketing Officer. Candidates for these posts wouldbe recruited by KTDA either directly or through consultants. Assurances wereobtained that if it proved impossible to recruit suitable persons for theseposts or for the posts of Factory Engineer, Factory Superintendent and Train-ing Officer, KTDA would employ consulting firms to fill this need and thateither individual consultants or consulting firms would be appointed withinsix months of loan effectiveness. In addition KTDA may employ consultantsto assist with the design and construction of factories.
0
C. Factory Companies (Annex 4)
5.07 All new KTDA factories would be established as limited companiesunder Kenya Company Ordinance with KTDA as the only shareholder (52 of totalinvestment). As factories become profitable, growers would be encouraged tobuy shares and the proceeds used to repay factory loans prematurely; from thebeginning growers would be represented on the Board of Directors of the factory.Under agreements concluded with KTDA which would be submitted to IBRD for com-ment, factories vwould continue the payment system under which all surpluseswould be distributed to growers as a second payment after deduction of oper-ating costs, debt service, first payment for growers' leaf, and a dividendpayment of 8% on share capital and taxes. New factory companies would appointKTDA as their managing agents for the design, supervision of construction,and management of factories and the provision of accounting, administrativeand marketing services. KTDA would levy a charge of Ksh 0.16/kg made tea forthese services (para 6.06). The financial position of factories is set forthin para 6.06.
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VI. PRODUCTION, PRICES AND BENEFITS
A. Production and Marketing (Annexes 2 and 7)
6.01 Production from existing plantings is estimated to increase from14,000 tons in 1972/73 to 39,000 tons at maturity in 1981/82. Tea from KTDAis presently sold through four different channels: London auctions (37%),Mombasa auctions (17%), pool sales to meet requirements of East African mar-kets (15%), and private contracts (31%). No major changes are expected underthe Project. KTDA's new marketing department would advise both the factorycompanies and the Authority's Board on marketing policy. Tea brokers wouldcontinue to sell tea produced by both existing factories operating undermanaging agency agreements and Project factories to be managed by KTDA.
B. Prices (Annex 7)
6.02 The main feature of the international trade in tea since the mid-50's has been a steady growth in export volume averaging about 2% annually.This, together with near stagnant demand, has caused average prices on theLondon market to fall from an average of 45.7 new pence/kg in 1970 to about42.2 new pence/kg in 1972, recovering to 42.9 new pence/kg in 1973. Recentprojections 1/ of supply and demand estimate a current price on the Londonmarket in 1980 of 55 new pence/kg which corresponds to a 1973 constant priceof 34.3 new pence/kg.
6.03 Comparative tea qualities and the price differentials between coun-tries are in part the result of climatic conditions which give rise to annualprice fluctuations. They also depend on the quality of planting material andtechnical standards in factories; in the latter, Kenya generally and KTDAin particular enjoy an advantage over ths older established estates in SriLanka and India. This has been reflected in Kenya's average tea prices,which have been among the three highest since 1970. In these years priceswere on average about 5% above the London average. KTDA's smallholders aregenerally situated in the most favorable climate areas and have achieved ahigh standard of tea plucking; its teas have thus earned a reputation ofabove average Kenya quality. It is therefore assumed that its tea wouldcontinue to enjoy a premium on world markets, and would in 1980 receive about57 new pence/kg (about 4% above current average London projected market prices).
C. Farmer Benefits (Annex 8)
6.04 At present prices, farmers planting 0.32 ha of tea over a two-yearperiod would receive a net return, after cess and debt service, rising fromKsh 87 in year 4 (the first year of plucking), to Ksh 1,300 at maturity in
1/ IBRD, Commodity Forecast, March, 1974.
- 16-
year 13 when all debts (repayments for planting material and fertilizer)would have been paid. This compares favorably with alternative net returnsfrom the same area of: maize Ksh 200, dairy cattle Ksh 140, and pyrethrumKsh 420. Given 1980 current price projections, the net return from teawould be Ksh 100 in year 4 and Ksh 1,500 at maturity. These net returns tofarmers from tea would be appreciably higher than those from other crops.
D. KTDA's Financial Position (Annex 9)
6.05 In addition to the existing sources of income (principally thecess on green leaf para 3.07), KTLA would under the Project earn additionalincome from a management charge of Ksh 0.16/kg made tea on all Project fac-tories. The dividends and interest from factory companies would be augmentedas the nunber of factories increases. In addition to current debt serviceliabilities, KTDA's prospective liabilities include loan repayment liabilitieson project loans, on loans of about US$5.9 million for the Fourth Tea Planand of about US$26 million required for further factory development and forvarious replacement needs. With the expected reduction in unit costs broughtabout by increased leaf production, KTDA would be in a position to meet thesecurrent and prospective obligations and reduce its green leaf cess by Ksh0.01/kg each year from the present level of Ksh 0.32/kg to Ksh 0.22/kg.Assurances were obtained that any reduction in green leaf cess of more thanKsh 0.01/kg annually would require the prior approval of IBRD.
E. Financial Position of Factory Companies (Annex 4)
6.06 Capital Structure and Financial Performance. Hitherto factorycompanies have been financed by a proportion of equity capital eligible fordividends (not exceeding an annual average of 8%) and loan capital (8 - 8-1/2%interest rate); all surpluses remaining after meeting these obligations andallowing for operating costs and accumulation of working capital are distri-buted to farmers as payment on green leaf delivered. These arrangementswould continue under the Project (para 5.07). In addition to these and otherrecurrent obligations, each new factory would in future pay KTDA a managementfee of Ksh 0.16/kg made tea which would equal the fees now payable to manag-ing agents but which are levied on a different basis. This fee would bechanged only after consultation with IBRD and assurances to this effect wereobtained. New factories are only established when a minimum economic through-out from the adjacent area is assured; thereafter payments to growers (whichare partially balanced out by KTDA between different factories) depend onfactory profitability. Financial projections (Annex 4) show that factorycompanies would be able to meet their obligations and make leaf paymentswhich would give farmers the average returns indicated in paragraph 6.04.
- 17 -
F. Government Budgetary Position (Annex 10)
6.07 Government revenues arising from the Project would be a 10% salestax on capital goods produced in or imported into Kenya and interest on theirloan to KTDA. Government cash outflows over the same period would be itscontribution to Project costs. Net Government outflows over the Projectperiod would be recovered by 1984/85 and the surplus would increase to Ksh 51million by 1993/94.
VII. ECONOMIC BENEFITS AND JUSTIFICATION
7.01 The Project would provide for the construction of 17 tea factoriesand for the related services required to process green leaf grown by about35,000 smallholders under previous tea planting programs. Tea with its highlabor requirements and high value is more advantageous both in terms of employ-ment and income than alternate agricultural activity in the area. About2,000 persons would be employed in factories and within KTDA. At full develop-ment in 1981/82, the factories would process about 19,000 tons of made teaper annum, about 85% of which would be exported. The gross foreign exchange
* value of exports at full development (1981/82 onwards) would amount to aboutKsh 130 million (US$18 million) per annum.
7.02 At the time of appraisal of the Second KTDA Project (1968) theeconomic rate of return was calculated to be between 16 and 25% dependingon the assumption made for shadow pricing labor. This calculation reflectedcosts and benefits attributable to the entire tea program including plantingsand estimated factory investment and operating costs. In recalculating theeconomic rate of return the Project was treated as an integral part of theSecond Project and adjustments were made to the calculations of the latterin order to reflect new developments. Costs of factories and their capacityhave been increased, resulting in a slight reduction in unit investment costs.Factory operating costs have also been revised and the cost of KTDA's FactoryManagement Service together with that of the training factory have been added.Estimates of production from the Second KTDA Project plantings were increasedby 6% representing the weighted average of latest yield estimates (Annex 2,Tables 2 and 3). Tea prices used are based on 1980 forecast prices at Londonauctions of 34.3 new pence/kg made tea (Ksh 4.86/kg made tea ex-factory), andexpressed in 1973 constant terms.
7.03 For the Second KTDA Project two rates of return were calculated.A rate of return of 16% was estimated on the assumption that the economiccost of on-farm labor (both family and hired labor) was equal to the 1968daily wage of Ksh 2.50; however, assuming no alternative opportunity forlabor, the rate of return was estimated at 25%. In the meantime, Governmental
*i programs have somewhat increased alternative employment opportunities (partic-le ularly for maize, pyrethrum and dairy cattle) so that in the present recalcula-
tion an opportunity cost for labor of one-half the 1973 daily wage rate of
- 18 -
Ksh 4.00 has been assumed. It has also been assumed that a rate of Ksh 10per US$1 reflects the economic value of foreign exchange to Kenya.
7.04 The Project economic rate of return calculated on the above assump-tion is 24%; with no shadow pricing of foreign exchange the rate of return is17%, and with no shadow pricing of either foreign exchange or labor, 10%.Possible factors that would adversely affect the outcome of the Project areincreases in capital and recurrent costs and a decrease in yields and prices.A 10% cost increase or a 10% reduction in benefits would reduce the rate ofreturn to 20%. The unlikely combination of both of these factors would reducethe rate to 17%, while a 10% increases in benefits would increased it to 28%.
7.05 Before their involvement in tea growing, the tea producers wereessentially limited to subsistence production. Under the Project, annual in-comes of farmers owning 0.32 ha of mature tea would, at present prices, beabout Ksh 1,300 (US$185). A combination of possible alternative agriculturalactivities would only provide an income of about Ksh 200 (US$30). Since theaverage per capita GNP of Kenya is estimated at about Ksh 1,200 (US$170) andthe average agricultural income at less than Ksh 420 (US$60), the tea programwould help primarily a poor segment of Kenya's population and would thus con-tribute to a more equitable distribution of income.
VIII. AGREEMENTS REACHED AND RECOMMENDATION 08.01 During negotiations, agreements were reached on the followingprincipal points:
(a) Government would onlend its contribution to Project costsat an interest rate of not less than 6-1/2% per annum; KTDAwould onlend to tea factories at a rate of 7-3/4% (para 4.06);
(b) Before proceeding with construction of individual factories,detailed plans, specifications and contract documents wouldbe agreed with IBRD (para 4.07);
(c) Appointments to the posts of Chief Factory Officer andMarketing Officer would be made only after consultationwith IBRD. In the event that KTDA experienced difficultiesin securing qualified and experienced personnel for the postsof Chief Factory Officer, Factory Engineer, Factory Super-intendent, Marketing Officer and Training Officer, within6 months after loan effectiveness KTDA would retain con-sultants acceptable to IBRD in order to carry out thesefunctions (para 5.06);
(d) Any reduction of KTDA's green leaf cess of more than Ksh 0.01/kgannually (para 6.05) would be subject to IBRD approval, and anychange in the management fee of Ksh 0.16/kg made teawould be made only after consultation with IBRD (para 6.06).
* - 19 -
8.02 The Project is suitable for an IBRD loan of US$10.4 million toKTDA at an anmual interest rate of 7-1/4% for 20 years with seven yearsmoratoriwu on principal.
.
S
ANNEX 1
KEYA
TEA FACTORY PROJECT
Value of Kenya's Principal Agricultural Exports(Exports excluding East African Comiunirity)
(Ksh million)
1971 1972
Exports
Coffee 390 496
Tea 238 328
Pyrethrum (extract & flowers) 55 76
Meat and meat products 73 98
Hides and skins 4'' 76
Sisal 30 41
Wattle extract and bark 25 35
Cotton 24 24
Other agricultural exports 60 91
Total Agricultural Exports 944 1,265
Other exports 520 547
Total exports 1,464 1,812
SOURCE: Economic Survey 1973, Central Bureau of Statistics, Nairobi.
March 26, 1974
KENYA
TEA FACTORY PROJECT
The Development of Kenya Tea
Smallholders Estates .Vota.
Tonal Small- KenynArea Growers Average Area holder Area
New Cumulative New Cumulative of Tea Planted (inel. Settle)ha no ha ha ha ha
First Tea Plan
End of Plan 1963/64 - 4,210 19,774 19,774 0.21 4,360 18,360 22,720
Second Tea Plan
(First IDA Project)End of Plan 1967/68 6,560 10,770 18,174 37,953 0.28 11,520 21,080 32,600
Third Tea Plan
(Second IDA Project)End of Plan 1971/72 13,700 24,470 27,191 65,144 0.38 24,470 N/A -
Settlements - 1,1430 - 1,783 - - _ -Total After Third Plan - 25,900 _ 66,927 0.39 25,900 23,000 48,900
1/ Estinated.T llet incre,se 1n total inoesnnerta in ten fu-toeri-e betwen -nily 1, 1971 0n0 1331 3- , 10'_
'ur-0
25. n,74
ANNEX 4Page 1
KENYA
TEA FACTORY PROJECT
Factory Development
General
1. There are twelve KTDA tea factories processing smallholder tea,one of which, Kianjakoma, produces green tea for the Japanese market. Eachfactory is established as a limited liability company with a Board ofDirectors on which growers are represented. Ten of the factories aremanaged by well established commercial tea companies acting as managingagents and operating under twenty year agreements. Two factories aremanaged directly by KTDA.
Capital Structure
2. The five factories most recently established each had authorizedshare capital of Ksh 200,000, comprising 20,000 founders shares held equally
*m by CDC and KTDA and valued at Ksh 5 (each carying 41 votes), and 20,000
growers shares also at Ksh 5 (with 1 vote). Of the authorized shares, only5,000 founders shares have actually been issued. Growers may acquire sharesin the factory to which they deliver leaf. Of the six factory companiesestablished before 1971, five have sold shares to growers ranging in valuefrom Ksh 30,220 by the Litein Factory to Ksh 141,700 by Ragati Factory
Company. In addition to share capital, each factory has loan capital of aboutKsh 4.5 million, provided by CDC and the managing agent and bearing interestat 8 or 8-1/2% per year. A chart showing the financial structure and pastperformance of factory companies is at Table 1.
3. Factories constructed under the Project would have a similarstructure. KTDA would, however, be the only source of share capital andlong term loans. The purchase of shares by growers would continue to beencouraged.
Factory Management
4. For those factories operated by managing agents remuneration is onthe basis of a standardized formula written into each managing agency agree-ment. This usually includes:
ANNEX 4Page 2
(a) A fee of Ksh 30,000/year (reduced under certain circumstances 1/);
(b) 2% commission on gross sales;
(c) 2-1/2% commission on all purchases made by the managing agents;and
(d) 1% commission on sales other than by auction, through a recognizedbroker, or to Associated Tea Growers of East Africa.
Average remuneration paid by factories in 1970 was Ksh 140,000. Managingagents supply staff whose salaries are paid by factories, and supervise thismanagement by inspection visits and regular reports. They also fulfillstatutory obligations under the Kenya Companies Ordinance, and provideaccounting and tea marketing services at their own expense.
New Services
5. Under the Project, factory companies would employ KTDA as theirmanaging agent responsible for:
(a) Design and supervision of factory construction including:basic feasibility studies; design of factories; procurement,tendering and bid evaluation; and supervision of the deliveryof plant and equipment and factory construction.
(b) Management of factories including: assistance in recruitmentof factory managers; supervision of manufacturing includingprocessing programs; supervision of repair and maintenance;and services as company secretary.
(c) The Marketing of Made Tea.
6. To fullfill these functions KTDA vould establish a Factory Department,a Marketing Department, a Secretary's Department and a special factory account-ing section in the Accounting Department.
7. A Chief Factory Officer would head the Factory Department, whichwould design and supervise construction of factories and determine process-ing programs. A Factory Superintendent, responsible to the Chief FactoryOfficer, would design manufacturing programs for individual factories inconsultation with Marketing Department, and would supervise their implementation.
8. The Factory Engineer, responsible to the Chief Factory Officer,would be responsible for design, procurement and supervision of construction
1/ If the 2% commission on sales exceeds Ksh 50,000.
ANNEX 4Page 3
of new factories and auxiliary buildings. He would also be responsible formaintenance of factories, buildings, vehicles and stores, and would overseethe work of factory mechanics.
9. The Factory Training Officer, responsible to the Chief FactoryOfficer, would be in charge of the training factory (a training wing annexedto one factory). His duties would include training of prospective factorypersonnel in:
(a) -lea manufacturing through all stages from green leaf to madetea;
(b) Operation and maintenance of factory machines; and
(c) Workshop practices.
He would cooperate with the Tea Research Instiute of East Africa, and theprivate sector in the development of new or modifications to existingmachinerv.
10. The Marketing Officer heading the Marketing Department would:
(a) Advise on marketing of made tea;
(b) Consult with the factory superintendent on manufacturingprograms for individual factories;
(c) Provide market intelligence on local and overseas markets; and
(d) Train KTDA and factory staff in tea testing and evaluation.
December 27, 1973
C a a a---- -- --- --
o 1?~~~~~~~~~~~~~~4C a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1
* a a~~~~~~~~~~~~~~~~~~~~~~~~. ....
Ca Caaa a~~~~~~I -a
ANNEX 4 KENYA Table 2
TEA FACTORY PROJECT
Projected Factory Requirements 1/ 2/(Based on District Production TargetsT
1/ Based on a factory capacity of 1,200 ton made tea (5,400 ton green leaf). A new factory would be constructed au soon as tte crop isabout 2,500 ton green leaf above the capacity of the existing factories. Some deviation from the calculated factory requirement is dueto local conditions, such as arrangements with private factories or indivisibilities of transportation arrangements.
2/ Factories would be sited to serve production zones and would not necessarily be confined to Districts.
3/ Factories shown in year in which they start operating, factory construction to start one year earlier.
October 18, 1973
ANNUX 4Table 3Page 1
-KENYA
TEA FACTOiY PXDJECT
Capital Costs of Tea Factory with Capacity of 1,200-Ton/year l/
CapitalCosts Useful Life
(Ksh 1000) (Years)
A. Land so
B. Buildings 1,200 20
1. Factory and Compound Bldgs.
a) Factoryb) Workshop and Storesc) Office Blocksd) Factory Ablution Blocke) Gate House
a) Site Leveiling Drains and Fence 20b) Tarmac Area 20c) E. L. Connecting to Houses 15d) CapiLal Contribution to GAP A L 2Ce) Elec. Installations to Factory 10f) Machinery Foundations 20g) dJater Supply 1$h) Furniture Fittings 10i) Planning Fees 20
Based on 1972/73 prices; capacity in ton made tea.
Price paid to growers K cents/kg green leaf-(before KTDA cess) - 03 98 101 103 107 114
1/ Price projections see Annex 7. Costs are based on 1973 prices and inflated up to 1980/81; see 9/2/ Share capital and debentures covering the full capital cost (including contingencies and working capital Ksh 975,000) of a factory (see Annex 4,
Table 3) fully subscribed in first year.3/ Total costs per factory (including working capital) are expected to increase to Ksh 9.2 million by 1977/78. Loan service, dividends and taxes
would then increase by Ksh 210,000/year. This would reduce payments to growers by K cent 4/kg green leaf.4/ For 16 years at 7 3/)4% interest with three years moratorium on principal.5/ At 10% interest; to cover difference between accumulated surpluses and working capital requirements (value of 2 month sales).6/ As factory makes no profit except for the 8% dividend paid to shareholders, taxation is limited to 68% of that dividend or 407. of total profit.
Taxable profits will be nil in first six years because of capital allowance.7/ Share capital (Ksh 376,000 or 5% of total long term capital) earns a fixed 8% dividend per year.8/ Cash surplus needed to cover working capital requirements (value of two month sales) which would be in 19(5/76 Ksh 800,000, in 19(6/7( Ksh 1.3 million
and Ksh 1.8 million thereafter. Difference to be covered by Bank overdraft; see 4/.9/ Cost of salaries and wages, general expenses,manufacturing, dispatch and selling and maintenance inflated by c%/year cumulative up to 80/81.
March 22, 1974
KENYA
TEA FACTORY PROJECT
Total Project Costs(Ksh '000)
Reference Foreoneign ExhanAnnex 5, Table 1974/75 1975/76 1976/77 1977/78 1978/79 Total % Total
Net recurrent costs 2,151 2,456 2,274 1,748 1,174 9,803
Cost of factory servicns without contingenoies 2,336 2.538 2,356 1.820 1,307 10.357 5,_95
1 Total capital and recurrent nxpeaditure attributable to new factory (excluding Traiuing Factory), marketing and Seoretarial Deportmentand inorennnte1 cents of A.ooooting Department.
i/ Intornatio..lly reoruited.3/ Consoltancioe for Factory end Marketing Department, and for Project eveloatism/ See Annex 2 Table 3.
March 25, 1
974
0
KENYA
TEA FACTORY PROJECT
Costs of Training Factory]Ksh'OOO
Foreign ExchangeUnit Cost 1974/75 1975/76 1976/77 1977/78 1978/79 Total Total
Total A L29 24,154 41.605 19,834 30,271 145,820 20,316 10,400 6.300
B. FINANCING
IBRD 51% of A 2/ - - 15,310 12,340 21,260 10,130 15,460 74,500CDC 31% of A 37 - - 9,220 7,440 12,810 6,110 9,320 44,900Government _ _ 10,139 7,9353 12,691 5,104 7,203 43,090
Finnncizg of Total Project Costs 5 1 34,669 27,733 46,761 21,344 31,983 162,490
1/ Excluding working capital.
2/ Corresponding to 46% of total Project costs or 50% of Project costs excluding sales tax. O
3/ Corresponding to 28% of total Project costs or 30% of Project costs excluding sales tat. os
h/ Total costs of factory construction divided 40%: 60% into category IV Civ`l works for factories and V Factory plant and equipment.
March 25, 1974
ANNEX 6Table 2
KENYA
TEA FACTORY PROJECT
Estimated Schedule of Disbursement
IBRD Cumulative DisbursementFiscal Year at end of quarterand quarter
(US ; '000)
1974/751st 6002nd 1,3003rd 2,9004th 3,60
1975/761st 4,1002nd 4,6003rd 5,2004th 55,800
1976/771st 6,4002nd 6,9003rd 7,3004th 7,800
1977/781st 8,1002nd 8,3003rd 8,50o4th 8,700
1978/791st 8,9002nd 9,1003rd 9,4004th 9,700
1979/801st 9,9002nd 10,1003rd 10,400
March 22, 1974
ANNEX 7Page 1
KENYA
TEA FACTORY PROJECT
The Tea Market
General
1. World tea production is largely concentrated in South Asia and EastAfrica. East Africa's share of world production and exports has increasedrapidly in recent years, while that of the main South Asian growers has beendeclining. While there has been an increase in the volume of world tea trade,aggregate export earnings have stagnated in the past decade as a result ofdeclining prices.
2. A potential surplus in the international tea market is indicatedby all recent projections of supply and demand. Long term price projectionsby the Commodities and Export Projections Division of IBRD put the "mostlikely" estimate of the average current London price for all made teas in1980 at 55 new pence/kg (para 9) which corresponds to a 1973 constant priceof 34.3 new pence/kg. This compares to an average of 43 new pence/kg in1967/69 and 42.9 in 1973.
3. Kenya's share of total world exports has increased from 1.3% in1955 to 5.7% in 1970, and amounted to 34,000 tons in 1971. 1/ About 83%of the country's production is exported and the rest is consumed domestically.Over the years the quality of tea exported has markedly improved. In 1959Kenya teas were 14% below London average price; in 1966 they surpassed theaverage, and in 1970 and 1971 were the wozrld's highest (6% and 9% above Londonaverage) and since then they have been ih the top three. Since 1967 Kenyatea has earned, on average, a quality premium of about two new pence/kg.Even though quality teas have sufferred from the increased use of lowerquality teas with an expanding market for tea bags and instant tea, it isexpected that Kenya's quality premium should remain at its present level.
4. Smallholder tea is expected to be 60% of Kenya's total tea productionby 1980 and an analysis of prices received by KTDA for smallholder teas showthem to be about equal to the Kenya average. For purposes of future projectionsit has been assumed that this relationship would continue. Although local Kenyaconsumption can be expected to grow rapidly, its share of total production isunlikely to increase.
1/ ITC Annual Bulletin of Statistics, 1969 and 1972.
ANNEX 7Page 2
Marketing Arrangements
5. KTDA sells tea through four different channels: (a) London auctions(37%); (b) Mombasa auctions (17%); (c) local pool sales for East Africa con-sumption (15%); and (d) private contracts (31X).
6. Generally speaking, the best teas are shipped to the London marketwhere quality is fully recognized and premiums are paid for tea destined forconsumption within Continental Europe and Britain. The Mombasa auctionsmainly cater to the needs of countries not buying at the London sales (e.g.Middle East and E'ersian Gulf countries), and tend to sell teas of intermediatequality. Prices obtained are generally not as high as in London. Teas soldthrough private contracts are a matter of agreement between the individualfactory company and the buyer; the price agreed is not released for publicinformation. The duration of contracts varies usually from 3-14 months andthe price may be either for the period of the contract or subject to periodicreview and adjusted up or down depending on the general movement of teaprices. The local pool is a form of cooperative selling by the major EastAfrican producers who have agreed not to compete with each other on the localEast African market. The managing agents for the scheme are N/S Brooke BondLiebig, and all teas are sold under their label. Members have an equal sharein supplying the local market; all teas marketed are valued by a panel oftasters in London. With the exception oi Ragati, all KTDA factory companiesare members of the pool which supplies more than 90 percent of the local market.Ragati Factory Company was obliged to resign from the pool for selling teasindependently to Uganda, and subsequent requests to rejoin have been rejected.
7. The following table shows the disposition of Kenya tea in tons.
Private5 year Ave. London % Mombasa Z Contracts X Pool %
1957/61 2,700 23 1,500 12 6,000 50 1,800 15
1962/66 5,900 22 3,800 14 11,068 41 6,110 23
1967/71 12,100 37 5,700 17 10,219 31 4,944 15
Tea Prices
8. Comparative tea qualities and the price differentials betweencountries are in part the result of climatic conditions which, to the extentof their variability, give rise to annual price fluctuations. They also de-pend however on the quality of planting material and technical standards infactories; here Kenya generally and KTDA operations particularly (being morerecently developed) enjoy an advantage over the older established estates inSri Lanka and India. Prices received for Kenya teas in London as comparedwith average prices for other quality tea producers are as follows:
ANNEX 7Page 3
--------------------- New Pence/Kg ----------------
Transport - Factory/Mombassa 11.0 K Cent/Kg made teaWarehouse and charges up to FOB 14.6 " "Freight 50.0Marine insurance 5.3London landing and warehouse
charges 39.1Sales charges and brokerage 10.2Agents commission 9.2
Total 139.4
Inflated by 6% per year from 1974 to 1980
1/ IBRD, Commodity Forecast, March, 1974.
ANNEX 7Page 4
The projected prices are current market prices; that is, according to themethod used the effect (if any) of inflation on tea prices in the worldmarket has already been accounted for. As monetary spillovers on tea pricesare considered to be negligible the figures show the expected real supply-demand-price relationship. A decline in tea prices substantially below 55new pence/kg is considered unlikely, as many tea enterprises would prove un-profitable at this level. The removal of marginal areas from production wouldreduce supply, thereby halting further ceclines in price. It must be notedthat any forecast should be viewed against the uncertainties surroundinglong-term demand and supply conditions.
10. In view of the importance of India both as a producer and as a con-sumer, the demand and supply situation in that country is going to have adirect bearing on the world situation as a whole. According to an FAO report"Outlook For The World Tea Market - 1968-1975", between 1955-57 and 1966-67,Indian tea consumption increased at 5.7 percent per annum, while productionincreased at only 2 percent per annum. The position has changed little sincethen. India's per capita consumption is still low, a reflection of thedeliberate Government policy to restrict local consumption. In generalwhen stocks in London reach certain levels and prices decline, India'slocal consumption goes up and exports are consequently reduced.
March 22, 1974
ANNEX 7Chart
ANNUAL AVERAGE TEA PRICES FOR SELECTED COUNTRIESAT LONDON AUCTIONS, 1955-1972
(NEW PENCE PER KILOGRAM)
SRI LANKA_
^~~~~~~~~~~~OT INI
S0 S
\~~~~~~~~~~~~~~~~~~~~~~~Wd San \ 486(
, e ~~~KENYA\/
WorXd Bmnk -4606ON)
AlUNE1 8
0 KENYA
TEA FACTORY PROJECT
Model Farm Buet (0.32 ha)
Y E A R
1 2 3 4 5 6 7 8 9 10 11 12 13 and following
Yield Kg made tea/ha 290 580 580 l,10 1,305 1,160 1,450 1,450 1,450 1,450
4/ Year 1, 260 kg/ha Single Superphosphate; NP$ 25:5:5; year 2, 180 kg/ha; year 3, 280 kg/ha; year 4, 375 kg/ha. Additional Sulphate of_ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ammonia:
5/ Cost of harvesting material, hired labor and fertilizer inflated by 6%/year from Year 2 to Year 8 (1980/81). Year 7, 180 kg/ha_ ~~~~~~~~~~~~~~~~~~~~~~~~~~year 8, 275 kg/ha6/ Ksh 0.05/kg green leaf delivered; 8% interest; last year calculated as residual. Year 9, 180 kg/ha
Year 10, 320 kg/ha
March 22, 1974
0
ANNEX 9Table 1
TEA FACTORY PROJECT
Kenya Tea Development Authority
Balance Sheet as at 30th June 1973
1972Ksh'OOO Ksh'OOO Ksh'OOO
7,359 FIXED ASSETS at cost less depreciation 7,993DEVELOPMENT EXPENDITURE
32,750 As at 1st July 1972 27,7644,986 Less income on agricultural operations for the
1/ Coetisgescy of 57. has been indented; cost decreasinR iron Ksh 0.32/kg grecn leaf iw 1973/74 to Ksh 0.22 is 1983/84.Z/ K.h 0.03 per ha-sh pisated.
3/ Kfh 0.16/kg node tea.4/ 8t en sheesheldiegs is nxittieg wed nes factories (share capital of Itoe f-so-la: 5' oF total innve.tsIt i al. L 'akiI'm -ap4ctl)5/ Asses 6, Table 1.6/ Sn-nre set yet deteenined.7/ Inclsde costs of P-ojec-t (Anne 5, Tabl 1) and of all otber KTDA operations.8/ 7.25 int-erest for 20 ye-rs with 3 years moratorium oc princspa1 fion first disb-se-ont onwardw. '21 m tS: ' 't O e_ ''<,r san -1 fo" a .:. at_ s.9/ 57. interesL fc '29 years with 7 years corntoriuo on principal fron first d-lb.r..ono. onwards T-o-: itr olso' i,o pro0rr_- i-l.,det Iosllanoaoo cron of .7i' per sna mir
smoosnts idisb--tsed.9,/.53" istercst for 57 yes rsa 57t1 7 yea- sa-oraoinoas- on prlas-ip.as shns' 'Is-st l0't 1 '
/ 5 iltere-t for 1i years sith 5 9Irt 01Tl-ator-i'- on r-olipcl s'so:a fisat (s.'b- is's::: o::'s-t o'. it as~/ 6. (anternot folr 19 years as/tI 0 ye-arc Tnas,'t^ri' s sax fa'lllcIp fr's first lOt's' so'oo ol in'r.:.s. r sw
1Z/ Assumead: 7.'5;' interest for 1( yearn witb 4 yea ooratori' so prIorly: I ao ' ''1' e a:o. 55 1405510 bo._I/ Reoiined ts -Work-ki- f'pital.
Total Income with 5% shortfallin cess income 33,395 41,038 50,859 59,470 66,9)7 75,155 79,909 84,856 88,549 56,812 86,548 86,057 85,325 83,479
Total Income with 10,% shorbfallin all income sources 31,418 38,551 47,650 55,602 62,549 70,178 74,551 79,o60 82,406 80,794 80,586 80,184 79,574 77,913
NET REVENUE SURPLUS WT13 591SNEOeTTAFLL IN C-SS INCOME (1,036) (85) 44 1,456 1,452 4,606 7,089 6,o88 5,956 6,498 7,318 7,992 8,932 8,769
NET REVENUE SURPLUS WITH 10%SHORTFALL IN ALL INCOKJE SOURCES (3,013) (2,572) (3,165) (2,4i2) (2,906) (371) 1,731 29J2 :187) 480 1,356 2,115 3,:81 3,205
11 4% on permanent buildings, 20% on temporary buildings, 25% on all motor vehicles and tractors, 10% on nursery and office eqaipmeat and furniture, 25% on scales all up to 1978/79.-;ereafter 20% on all capital expenditure. Reducing balance method.
1/ Negative figures represent excess of interest receivable from Ragati factory over interest payable to Marketing Board.3/ Incl ding comitment charge of 3/4% per year.
March 20, 1974 * i
KENYA
TEA FACTORY PROJECT
Government Cash Flow Arising from the Project /(Ksh Million)
1/ Repayment of Government loans by KTDA ends 1993/94
_ Government s contribution of Ksh 43.1 million at 6.5% interest for 20 years with 7 years moratorium on principal, including working capital for factories.
3 Cumulative surplus by 1993/94 Ksh 51 million,
March 25, 1974
ANNEX 1 1Page 1
KENYA
TEA FACTORY PROJECT
Economic Rate of Return
1. The economic rate of return is based on calculations made in theSecond KTDA Project1/ (Report TO-632a) which was appraised in 1968. Thatcalculation reflected costs and benefits attributable to new plantings of14,000 ha of tea and included a tentative allocation of factory investmentand operating costs. In the revised calculation the following adjustmentshave now been made to costs and benefits to reflect the present situation.
2. Costs
(a) Cost of on-farm labor. For the Second XTDA Project two ratesof return were calculated. A rate of return of 16% was esti-mated on the assumption that the economic cost of on-farmlabor (both family and hired labor) was equal to the 1968daily wage of Ksh 2.50; however, assuming no alternativeopportunity to labor, the rate of return was estimated at25%. In the meantime, Governmental programs have somewhatincreased alternative employment opportunities (particularlyfor maize, pyrethrum and dairy cattle) so that in the presentre-calculation an opportunity cost for labor of one-half the1973 daily wage rate of Ksh 4.00 has been assumed.
(b) Factory Capital Costs. Tea planted under KTDA's previousplans requires 18 new factories of 1,200 ton/year capacitybetween 1973/74 and 1978/79; of these 17 will be financedunder the Project.
Of the 18 factories required, 14 are assumed to processtea from Second KTDA Project plantings and have been includedin the costs. Together with 4 factories built before theProject they would provide a processing capacity of 20,400ton/year for an estimated production from the Second KTDAProject of 19,000 ton/year by 1981/82. Factory constructioncosts (including 5% physical contingencies but excludinga sales tax of 10%) have altered with the increased size offactory from Ksh 4.8 million for a 900 ton/year factory toKsh 5.6 million for 1,200 ton/year factory. This has slightlydecreased the unit cost. A useful life for each factory of16 years has been assumed, coimpared to 20 years in the 1968calculation; Capital costs have been repeated from 1986/87to 1995/96.
1/ This project covered KTDA's Third Tea Plan.
ANNEX 11Page 2
(c) Factory Services. (Annex 5, Table 2). The cost of KTDA'snew factory management service, (including 5% physicalcontingency), has been allocated proportionately to thefactories supported by the service.
(d) Factory Operating Costs. (Annex 4, Table 4). Total operat-ing costs which exclude transport and marketing costs and afee for KTDA's management services (para c) have been recal-culated as follows:
Year 1 Year 2 Year 3 onwards------- Ksh '000------------
In the 1968 calculation factory operating costs includedtransport and marketing cost F.O.B. Mombasa.
(e) Training Factory (Annex 5, Table 3). Full capital and recurrentcosts (including 5% physical contingencies) of the TrainingFactory have been added to costs.
3. Benefits 0(a) Production. Estimates of annual tea production have been increased
by 6% above 1968 estimates, in line with the weighted average ofrevised long-term yield estimates (Annex 2, Tables 2 and 4).Production would increase from 5,000 ton made tea in 1974/75 to19,000 ton made tea in 1981/82.
(b) Made Tea Prices. In the 1968 calculation prices F.O.B. Nombasawere used. Prices have now been calculated ex-factory andinclude dispatch and marketing costs to London tea auctions.From 1973/74 onwards, a constant price of Ksh 4.86/kg madetea has been used. This figure was arrived at as follows:
Average constant price 1973London auction (on basis of 1980current price of 55 new pence/kg) new pence 34.3/kg made tea
Quality premium for Kenya tea new pence 2.0/kg "
Price for Kenya Tea new pence 36.3/kg " "
Converted at Ksh 17.25:100 new pence Ksh 6.26/kg " "
Dispatch and Marketing costs (Annex 7) Ksh 1.40/kg "
Price ex-factory Ksh 4.86/kg " "
.
ANNEX 11Page 3
4. Shadow Rate of Forein Exchange
It has been assumed that a rate of Ksh 10 per US$1 reflects thevalue of foreign exchange to Kenya.
5. Rate of Return
Based on the above assumptions the economic rate of return over35 years would be 24%. With no shadow rating of foreign exchange, the rateof return would be 17%.
6. Sensitivity Analysis
The sensitivity of the internal economic rate of return of theProject to changes in some of the basic assumptions used in the calculationis shown below:
Internal Rate of Return
(a) 10% increase in cost 20.7(b) 10% reduction in benefits 20.3(c) 10% increase in cost and 10% reduction
in benefits 16.5(d) 10% increase in benefits 28.2(e) Without shadow pricing on-farm labor and
1/ Before interest and depreciation, including physical contingencies.2/ Planting material, field supervision, leaf collection, KTDA Head Office and Training Farm.
3/ Fertilizer and Nursery Unit Materials.4/ See Annex 11, Para 2a,5/ 320 km of new roads at Ksh 25,000/km; maintenance at Ksh 375/km/year.6/ See Annex 11, para 2b.7/ See Annex 11, para 2c.8/ See Annex 11, para 2d.9/ See Annex 11, para 3.
